This drive for ownership has been a theme of the marketplace for a number of years, but never more pronounced than it is in 2016

In the first of a new series of articles, Tony Evans, head of pharmacy at Christie & Co, appraises the state of the market for pharmacy businesses in light of the announcement on funding cuts

2016 has certainly been an interesting year for the pharmacy market. The New Year was ushered in against the background of the Department of Health’s unwelcome funding cut proposals, with a climate of confusion prevailing among both contractors and commentators as we awaited results of the consultation. Reactions were mixed, with some opting to accelerate plans to exit the market and others eyeing up perceived opportunities.

Contractors’ and sector representatives’ compelling counter-arguments to the DH’s proposals resulted in a delayed decision, and the then pharmacy minister leaving his position caused its deferral past the summer recess. As a result, the market was left in a state of flux.

Another matter weighing on the minds of the nation was the EU Referendum, the result of which has continued to keep the press, political and market commentators busy ever since. As Brexit’s effect on the wider economy remains speculation, no-one can be certain of the implications of a ‘hard’ or ‘soft’ Brexit.

All that can be said with any degree of certainty is that anything that affects the NHS will have knock-on effects for the pharmacy sector. Nevertheless, the pharmacy market appears to have taken this in its stride, with many seeming to adopt the mantra of ‘keep calm and carry on’.

Positive market sentiment

Our own activity is evidence of this. In 2015 we completed on over 70 pharmacy sales, receiving an average of eight offers each, with sale prices significantly above quoted guides. This performance has been mirrored in 2016, as many continue to view the sector as a safe haven for investment. Portfolio disposals have been met with significant interest, further underpinning the positive market sentiment.

The first quarter of 2016 saw applicant numbers increase to the highest level in five years, with just over 4,700 registered on our database. Of particular interest was the applicant breakdown and its development  over a relatively short period of time. In late 2015, approximately 79 per cent of applicants registering with us were first-time buyers or new entrants to the market. Three months down the line, this had risen to almost 84 per cent.

This was largely down to concerns of locums and pharmacy managers that they would bear the brunt of cost-saving measures introduced by contractors in reaction to the proposed cuts. This drive for ownership has been a theme of the marketplace for a number of years, but never more pronounced than it is in 2016.

Additionally, the appetite of existing independent and multiple operators has increased, as many grasp the opportunity to snap up pharmacies as more come to market. Both recent independent sales and corporate disposals continue to bear testimony to this.

The flurry of instructions that characterised the first quarter settled down towards the end of the second, as rumoured delays to the funding cuts allayed the fears of some operators that had been seeking to make an early market exit.

Despite some perceptions, funding remains relatively accessible as banks continue to actively lend to operators with proven track records or solid business plans.
Pharmacy minister David Mowat faced the House of Commons on October 20
to announce that funding for 2016/17 would be reduced by £113m to £2.687bn, and cut by a further £95m in 2017/18 to reduce the global sum to £2.592bn. Whilst concerning in itself, this year’s cut over the remaining four months of the financial year from December equates to a 12 per cent reduction over this period.

The fight-back

The severity of the cut has been met with overwhelming criticism and indeed anger, with many tabling plans to fight the cuts. These range from harnessing public support, to suggestions of crowd funding to mount a legal challenge.

But many have been left scratching their heads while they try to work out how
their businesses and their patients will be impacted by these cuts. This may be fuelled by some commentators making predictions based on averaged figures. However, it is clear that the way in which cuts hit different sized pharmacies will impact some more severely than others.

While it is too soon to predict the full impact, we believe the market will absorb it, despite the clear challenge. And contractors will show their resourcefulness and resilience to what is such an ill-timed and ill-considered plan.

One week on, we continue to see applicants register for opportunities, pharmacies coming to market, offers being received and sales being agreed. While interested parties may adopt a more considered approach, we remain optimistic about the long-term future of the sector.